MMR stipulates that affordability needs to be provable for the lifetime of the mortgage. With traditional annuities giving a fixed income for life, the affordability test would have been an easy calculation, albeit not always a positive one.
Now with the pension freedoms coming into effect, we expect to see more difficulty in proving a set income and even greater difficulty for borrowing into retirement.
It comes as no surprise that borrowers are looking towards more flexible solutions for lending into retirement, such as lifetime mortgages or secured loans.
Clearly, the warmth with which the chancellor’s new ‘sell your annuity for cash’ measures have been received highlights the demand for keeping your wealth on tap ready to use at a moment’s notice.
Lifetime mortgages are an effective tool to make your wealth more flexible. They have reacted to the changing demographics and client demands. Just as there is no typical retirement age anymore, neither is there a typical retirement plan.
Some are living retirement day-to-day, through necessity or design, making a string of important choices as they go along.
In the past, marketing financial services products to retirees was easier because most followed a well-worn path. Now, products need to have the flexibility built-in so that the customer can dictate how they are used.
Younger clients want the flexibility to pay interest and so some plans now allow for that. On some plans, interest repayments are not compulsory meaning if you don’t pay the interest it just gets added to the loan. This way, they are not required to meet the same strict affordability criteria that are strangling mortgage lending into retirement.
In many cases, long-standing, relatively young customers with very little left on their mortgage balance are being refused term extensions because of a computer says no approach. There’s no grandfather clause for existing borrowers who have a good history with the lender.
It’s not only mortgage issues driving the uptake amongst younger customers. There is something of a price war ongoing at the moment with some historically rates. In a high-rate environment, younger borrowers may be inclined to wait before releasing equity to minimise the effect of interest-roll up over time. However, with rates as low as they are, many younger borrowers are seeing now as the time to take advantage.
